High Probability Trading With CFDs
Many traders are seeking high probability trading strategies for trading CFDs.
The attraction of these strategies is obvious as the more often a strategy is correct, the easier it is to trade.
It is not necessary to endure long periods of losing trades, drawdown in account balances is less and the leverage of CFDs does not have the same impact on an account.
However traders seeking high probability trading strategies may be missing the whole point of trading.
Its Not About Being Right The success of a trading strategy is dependent on two factors, how often the strategy wins and the risk reward of the strategy.
It is the combination of these two factors that determines the results, not one of them in isolation.
Consider the following trading strategy that is profitable 95% of the time.
The strategy wins $100 on each profitable trade, so from 100 trades the strategy makes $9,500 trades on average.
But what happens on the other 5% of the trades.
If the strategy loses $2,500 when it doesn't work then from 100 trades it will lose $12,500.
Overall the strategy, even though it is right 95% of the time, loses money.
It is the combination of risk reward and hit rate or win%.
Even High Probability Trading Strategies Can Lose Typically high probability trading strategies follow the following formula, they take small profits when they are available and run very large stops.
FAP Turbo, the Forex trading robot, uses exactly this strategy.
So for a while the strategy appears to work well, until it gets hit with a number of very large losses.
To reduce the size of the loss it is necessary to tighten the stop, but this typically reduces the success rate of the strategy.
Find the Balance Finding an optimal relationship between the level of the stop loss and the success rate of the strategy requires testing the idea to determine the trade off between risk/reward and success rate.
In my personal testing around trading chart patterns I have found that the best trades go well from the start and do not look back.
Tight stops can be used with a positive impact on the results of the strategy.
I have also found that using profit targets limits gains and while it improves the overall win percentage it does not improve the overall profitability of the strategy.
Making Money is More Important Than Being Right A trend following strategy is right around 30% of the time, but when it does win it wins big, with a risk reward of 3 or more.
This is a profitable trading strategy, as is a short term scalping strategy that wins 70% of the time with a risk reward of 1:1.
In the pursuit of being right and chasing high probability trading strategies, remember to ensure that trading is about making money, not being right.
The attraction of these strategies is obvious as the more often a strategy is correct, the easier it is to trade.
It is not necessary to endure long periods of losing trades, drawdown in account balances is less and the leverage of CFDs does not have the same impact on an account.
However traders seeking high probability trading strategies may be missing the whole point of trading.
Its Not About Being Right The success of a trading strategy is dependent on two factors, how often the strategy wins and the risk reward of the strategy.
It is the combination of these two factors that determines the results, not one of them in isolation.
Consider the following trading strategy that is profitable 95% of the time.
The strategy wins $100 on each profitable trade, so from 100 trades the strategy makes $9,500 trades on average.
But what happens on the other 5% of the trades.
If the strategy loses $2,500 when it doesn't work then from 100 trades it will lose $12,500.
Overall the strategy, even though it is right 95% of the time, loses money.
It is the combination of risk reward and hit rate or win%.
Even High Probability Trading Strategies Can Lose Typically high probability trading strategies follow the following formula, they take small profits when they are available and run very large stops.
FAP Turbo, the Forex trading robot, uses exactly this strategy.
So for a while the strategy appears to work well, until it gets hit with a number of very large losses.
To reduce the size of the loss it is necessary to tighten the stop, but this typically reduces the success rate of the strategy.
Find the Balance Finding an optimal relationship between the level of the stop loss and the success rate of the strategy requires testing the idea to determine the trade off between risk/reward and success rate.
In my personal testing around trading chart patterns I have found that the best trades go well from the start and do not look back.
Tight stops can be used with a positive impact on the results of the strategy.
I have also found that using profit targets limits gains and while it improves the overall win percentage it does not improve the overall profitability of the strategy.
Making Money is More Important Than Being Right A trend following strategy is right around 30% of the time, but when it does win it wins big, with a risk reward of 3 or more.
This is a profitable trading strategy, as is a short term scalping strategy that wins 70% of the time with a risk reward of 1:1.
In the pursuit of being right and chasing high probability trading strategies, remember to ensure that trading is about making money, not being right.
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